Russia-Ukraine Conflict: Has it changed the performance of hedge funds? 

Sept 2022, By Leila Majidizavieh


Disruptive events such as wars generally alter the risk and return characteristics of asset classes. These events also change asset class correlations and the way asset managers set their asset allocation strategies [1]. The Russia-Ukraine conflict has significantly affected the world’s financial markets. Subsequentially, one would expect hedge fund returns to be impacted. It is also important to ascertain which strategies perform better before and after the conflict and if this has significantly changed because of the event.

AlternativeSoft’s analytical platform is used to carry out a study spanning from Aug 2021 to July 2022. This period is split into pre-invasion (Aug 2021 to Jan 2022) and post-invasion (Feb 2022 to July 2022) periods. The study addresses whether there has been a significant shift in the performance of hedge funds, and if so, in what direction. The investment universe is comprised of 400 hedge funds with varying strategies. The funds analysed have existed throughout the entirety of the period [2].

How different asset classes performed during the analysis

To better evaluate the performance of the selected hedge funds, it is necessary to understand the dynamics of different asset classes during the analysis period. The return, risk, and correlation characteristics of the 4 main asset classes including equities, fixed incomes, commodities, and hedge funds have been analysed using AlternativeSoft. During the year-long period, all the asset classes showed negative returns except the commodities market. The selected equity market index (S&P500) lost 8.68% of its value from Aug 2021 to July 2022. The return for the fixed income index (Barclays Capital U.S. Aggregate Bond Index) and hedge fund index (HFRI fund weighted composite index) was -14.23%, and -4.01% respectively. The commodity market, represented via the S&P GSCI index increased 31.34% during the sample period (Aug 2021 to July 2022). The trend started before the war, and it continued to grow after the invasion. All other asset classes experienced bearish markets before the conflict, and this further deteriorated after the conflict began.

From a risk perspective, not only did the volatility of all the asset classes increase after the conflict, but the correlation between these asset classes also changed. This is not surprising and is supported by empirical studies of financial markets.

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